Emerging market (EM) currencies were remarkably calm in June despite growing turmoil in the euro-zone. Our synthetic EM exchange rate against the dollar depreciated by 0.5% last month. But the big picture is that EM currencies have already weakened by more than 20% against the dollar during the past two-anda-half years (See Chart) and no longer appear to be particularly overvalued. Accordingly, while we expect most EM currencies to experience some mild depreciation against the dollar during the next eighteen months as the Fed begins to lift interest rates, another slump does not appear to be on the cards.
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